The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to those discussed in this section as well as factors described in Part II, Item 1A "Risk Factors." Overview Strategic Direction of Our BusinessNektar Therapeutics is a research-based biopharmaceutical company that discovers and develops innovative new medicines in areas of high unmet medical need. Our research and development pipeline of new investigational drugs includes treatments for cancer and autoimmune disease. We leverage our proprietary and proven chemistry platform to discover and design new drug candidates. These drug candidates utilize our advanced polymer conjugate technology platforms, which are designed to enable the development of new molecular entities that target known mechanisms of action. We continue to make significant investments in building and advancing our pipeline of proprietary drug candidates as we believe that this is the best strategy to build long-term stockholder value. In immuno-oncology (I-O), we are executing a clinical development program for bempegaldesleukin (previously referred to as NKTR-214), in collaboration with Bristol-Myers Squibb Company (BMS) as well as other independent development work evaluating bempegaldesleukin in combination with other agents with potential complementary mechanisms of action. We announced in August of 2019 that the FDA granted a Breakthrough Therapy designation for bempegaldesleukin in combination with Opdivo® for the treatment of patients with untreated unresectable or metastatic melanoma. We expect our research and development expense to continue to grow over the next few years as we expand and execute our broad clinical development program for bempegaldesleukin. OnJanuary 9, 2020 , we and BMS entered into an Amendment No. 1 (the Amendment) to the Collaboration Agreement. datedFebruary 13, 2018 (the BMS Collaboration Agreement). Pursuant to the Amendment, we and BMS agreed to update the Collaboration Development Plan under which we are collaborating and developing bempegaldesleukin. Specifically, pursuant to the updated Collaboration Development Plan, bempegaldesleukin in combination with Opdivo® is currently being evaluated in ongoing registrational trials in first-line metastatic melanoma, first-line cisplatin ineligible, PD-L1 low, locally advanced or metastatic urothelial cancer, first-line metastatic renal cell carcinoma (RCC), and muscle-invasive bladder cancer, and also includes an additional registrational trial in adjuvant melanoma, as well as a Phase 1/2 dose escalation and expansion study to evaluate bempegaldesleukin plus Opdivo® in combination with axitinib in first line RCC in order to support a future Phase 3 registrational trial. Several other registrational-supporting pediatric and safety studies for the combination of bempegaldesleukin and Opdivo® are either currently underway or planned to begin in 2020. Also, as specifically allowed under the BMS Collaboration Agreement, Nektar is independently studying bempegaldesleukin and pembrolizumab in a non-small cell lung cancer (NSCLC) Phase 1/2 trial. The Amendment did not alter the cost-sharing methodology under the BMS Collaboration Agreement. The parties share development costs based on each party's relative ownership interest in the compounds included in the regimen. For example, we share clinical development costs for bempegaldesleukin in combination with Opdivo®, BMS 67.5% and Nektar 32.5%. For costs of manufacturing bempegaldesleukin, however, BMS is responsible for 35% and Nektar is responsible for 65% of costs. BMS supplies Opdivo® free of charge. We also share commercialization related costs, 35% BMS and 65% Nektar, which we present in general and administrative expense. Our share of development costs is limited to an annual cap of$125.0 million . To the extent this annual cap is exceeded, we will recognize our full share of the research and development expense and BMS will reimburse us for the amount over the annual cap which will be recorded as a contingent liability. This contingent liability will be paid to BMS only if bempegaldesleukin is approved and solely by reducing a portion of our share of net profits following the first commercial sale of bempegaldesleukin. The BMS Collaboration Agreement entitles Nektar to receive up to$1.455 billion of clinical, regulatory and commercial launch milestones. These milestones include development milestones of a$25.0 million non-refundable, creditable milestone payment following the achievement of the first-patient, first-visit milestone in the registrational muscle-invasive bladder cancer trial (achieved inJanuary 2020 ) and a$25.0 million non-refundable, non-creditable milestone payment following the achievement of the first-patient, first-visit milestone in the registrational adjuvant melanoma trial. Of the remaining milestones,$625.0 million are associated with the approval and launch of bempegaldesleukin in its first indication in theU.S. , EU andJapan (which reflects the reduction for the$25.0 million nonrefundable, creditable milestone for the first patient, first visit in the muscle-invasive bladder cancer trial that BMS paid to us inMarch 2020 ). As a result, whether and when bempegaldesleukin is approved in any indication will have a significant impact on our future results of operations and financial condition. 22 -------------------------------------------------------------------------------- Table of Contents Outside of the collaboration development plan with BMS, we are conducting and pursuing additional research and development activities evaluating bempegaldesleukin in combination with other agents that have potential complementary mechanisms of action. Our strategic objective is to establish bempegaldesleukin as a key component of many I-O combination regimens with the potential to enhance the standard of care in multiple oncology settings. With our non-BMS clinical collaborations for bempegaldesleukin, we generally share clinical development costs on a substantially pro-rata basis commensurate with our ownership interest in the underlying compounds. We expect to continue to make significant and increasing investments exploring the potential of bempegaldesleukin with mechanisms of action that we believe are synergistic with bempegaldesleukin based on emerging scientific findings in cancer biology and preclinical development work. We are also advancing other molecules, including NKTR-262 and NKTR-255, in our I-O portfolio. NKTR-262 is a small molecule agonist that targets toll-like receptors (TLRs) found on innate immune cells in the body. NKTR-262 is designed to stimulate the innate immune system and promote maturation and activation of antigen-presenting cells (APCs), such as dendritic cells, which are critical to induce the body's adaptive immunity and create antigen-specific cytotoxic T cells. NKTR-262 is being developed as an intra-tumoral injection in combination with systemic bempegaldesleukin in order to induce an abscopal response and achieve the goal of tumor regression in cancer patients treated with both therapies. The Phase 1/2 dose-escalation and expansion trial of NKTR-262 in patients with solid tumors is currently ongoing. NKTR-255 is a biologic that targets the interleukin-15 (IL-15) pathway in order to activate the body's innate and adaptive immunity. Activation of the IL-15 pathway enhances the survival and function of natural killer (NK) cells and induces survival of both effector and CD8 memory T cells. Preclinical findings suggest NKTR-255 has the potential to synergistically combine with antibody dependent cellular cytoxicity molecules as well as enhance CAR-T therapies. We have initiated a Phase 1 clinical study of NKTR-255 in adults with relapsed or refractory non-Hodgkin lymphoma or multiple myeloma. We also plan to initiate a Phase 1 study for NKTR-255 in solid tumor settings this year. In immunology, we are developing NKTR-358, which is designed to correct the underlying immune system imbalance in the body that occurs in patients with autoimmune disease. NKTR-358 is designed to optimally target the IL-2 receptor complex in order to stimulate proliferation and growth of regulatory T cells. NKTR-358 is being developed as a once or twice monthly self-administered injection for a number of autoimmune diseases. In 2017, we entered into a worldwide license agreement with Eli Lilly and Company (Lilly) to co-develop NKTR-358. We received an initial payment of$150.0 million inSeptember 2017 and are eligible for up to an additional$250.0 million for development and regulatory milestones. We are responsible for completing Phase 1 clinical development and certain drug product development and supply activities. We also share Phase 2 development costs with Lilly, with Lilly responsible for 75% and Nektar responsible for 25% of these costs. We will have the option to contribute funding to Phase 3 development on an indication-by-indication basis, ranging from zero to 25% of the Phase 3 development costs. Lilly will be responsible for all costs of global commercialization and we will have an option to co-promote in theU.S. under certain conditions. We have completed a Phase 1 dose-finding trial of NKTR-358 to evaluate single-ascending doses of NKTR-358 in approximately 100 healthy patients. Results from this study demonstrated a multiple-fold increase in regulatory T cells with no change in CD8 positive or natural killer cell levels and no dose-limiting toxicities were observed. We also completed treatment of a Phase 1 multiple-ascending dose trial to evaluate NKTR-358 in patients with systemic lupus erythematosus (SLE). Lilly is expected to initiate a Phase 2 study in SLE in mid-2020 and to start an additional Phase 2 study in another auto-immune disease in 2020. These clinical studies are in addition to the two Phase 1b studies in patients with psoriasis and atopic dermatitis being run by Lilly. We were developing NKTR-181 for the treatment of chronic low back pain in adult patients and had submitted an NDA for NKTR-181. At the FDA advisory committee meeting held onJanuary 14, 2020 , the jointFDA Anesthetic Drug Products Advisory Committee andDrug Safety and Risk Management Committee did not recommend approval of NKTR-181, and, as a result, we withdrew the NDA and decided to make no further investment commitments to this program. The level of our future research and development investment will depend on a number of trends and uncertainties including clinical outcomes, future studies required to advance programs to regulatory approval, and the economics related to potential future collaborations that may include up-front payments, development funding, milestones, and royalties. Over the next several years, we plan to continue to make significant investments to advance our early drug candidate pipeline. We have historically derived all of our revenue and substantial amounts of operating capital from our collaboration agreements including the BMS Collaboration Agreement, pursuant to which we have recognized$1.11 billion in revenue and recorded$790.2 million in additional paid in capital for shares of our common stock issued in the transaction. While in the near-term we continue to expect to generate substantially all of our revenue from collaboration arrangements, including the potential remaining$1.405 billion in development and regulatory milestones under the BMS collaboration, in the medium- to long-term, our plan is to generate significant commercial revenue from proprietary products including bempegaldesleukin. Since we do not 23 -------------------------------------------------------------------------------- Table of Contents have experience commercializing products or an established commercialization organization, there will be substantial risks and uncertainties in future years as we build commercial, organizational, and operational capabilities. We also receive royalties and milestones from two approved drugs. We have a collaboration with AstraZeneca for MOVANTIK®, an oral peripherally-acting mu-opioid antagonist for the treatment of opioid-induced constipation in adult patients with non-cancer pain which was approved by the FDA and subsequently launched inMarch 2015 and MOVENTIG®, for the treatment of opioid-induced constipation in adult patients who have an inadequate response to laxatives, which was approved by health authorities in theEuropean Union and many other countries beginning in 2014. We also have a collaboration with Baxalta Inc. (a wholly-owned subsidiary of Takeda Pharmaceutical Company Ltd.) for ADYNOVATE®, that was approved by the FDA in late 2015 for use in adults and adolescents, aged 12 years and older, who have Hemophilia A. ADYNOVI™ was approved by health authorities inEurope inJanuary 2018 , and has also been approved in many other countries. Our business is subject to significant risks, including the risks inherent in our development efforts, the results of our clinical trials, our dependence on the marketing efforts by our collaboration partners, uncertainties associated with obtaining and enforcing patents, the lengthy and expensive regulatory approval process and competition from other products. For a discussion of these and some of the other key risks and uncertainties affecting our business, see Item 1A. Risk Factors. While the approved drugs and clinical development programs described above are key elements of our future success, we believe it is critically important that we continue to make substantial investments in our earlier-stage drug candidate pipeline. We have several drug candidates in earlier stage clinical development or being explored in research that we are preparing to advance into the clinic in future years. We are also advancing several other drug candidates in preclinical development in the areas of I-O, immunology, and other therapeutic indications. We believe that our substantial investment in research and development has the potential to create significant value if one or more of our drug candidates demonstrates positive clinical results, receives regulatory approval in one or more major markets and achieves commercial success. Drug research and development is an inherently uncertain process with a high risk of failure at every stage prior to approval. The timing and outcome of clinical trial results are extremely difficult to predict. Clinical development successes and failures can have a disproportionately positive or negative impact on our scientific and medical prospects, financial condition and prospects, results of operations and market value. Effects of the COVID-19 Pandemic During the first quarter of 2020, a novel strain of coronavirus (SARS-CoV-2) that was first identified inWuhan, China spread to other countries. InMarch 2020 , COVID-19, the disease resulting from coronavirus infection, was declared a global pandemic. Many countries, includingthe United States andIndia , have taken steps to slow or moderate the spread of the virus. These steps include, among others, restricting travel, closing schools, and issuing shelter-in-place orders. It remains unclear how long these measures will remain in place and whether these measures will be effective. Currently, with respect to the operation of our facilities, we are closely adhering to applicable guidelines and orders. Essential operations in research, manufacturing and maintenance that occur within our facilities are continuing in accordance with the permissions granted under government ordinances. Across all our locations, we have instituted a temporary work from home policy for all office personnel who do not need to work on site to maintain productivity. At this time, we have not identified a material change to our productivity as a result of these measures, but this could change, particularly if restricted travel, closed schools, and shelter-in-place orders are not removed or significantly eased. The safety and well-being of our employees, and the patients and healthcare providers in our clinical trial programs, are of first and foremost importance to us. We believe that the safety measures we are taking and instructing our contractors to take in response to the COVID-19 pandemic meet or exceed the guidance and requirements issued from government and public health officials. We and our partners are currently engaged in the clinical testing of our proprietary drug candidates and the COVID-19 pandemic introduces significant challenges to our clinical development programs which are central to our business. The evolving situation around the COVID-19 pandemic, along with the resulting public health guidance measures that have been put into place, have thus far had varying impacts on the clinical testing of our proprietary drug candidates depending on the therapeutic indication, geographic distribution of clinical trial sites, the clinical trial stage, and, in certain cases, our partners' general corporate approach to the COVID-19 pandemic. The rapid development and fluidity of the COVID-19 pandemic precludes any firm estimates as to the ultimate effect this disease will have on our clinical trials, our operations and our business. As a result, any current assessment of the effects of the COVID-19 pandemic, including the impact of this disease on our specific clinical programs as discussed below, is difficult to predict and subject to change. Specifically, for the ongoing registrational clinical trials studying the combination of bempegaldesleukin and Opdivo® in cancer indications being led by Nektar (such as RCC and first-line cisplatin ineligible, PD-L1 low, locally advanced or metastatic urothelial cancer), although we have not seen evidence to date that the COVID-19 pandemic has had a significant impact on 24 -------------------------------------------------------------------------------- Table of Contents enrollment for these trials, the future impact of the COVID-19 pandemic on these trials is very difficult to predict and, with regard to individual clinical trial sites within these studies, will likely vary by the geographic region in which they are located. For Nektar's Phase 1/2 trial studying bempegaldesleukin and pembrolizumab in NSCLC, the COVID-19 pandemic delayed the initiation of certain investigator sites inEurope . More recently, however, we have made progress against our plans to initiate investigator sites in certain European countries and other locations. Based on present estimates, we currently expect to have initial safety as well as preliminary overall response rate data for an initial set of patients in the dose-escalation and NSCLC cohorts of this study by the end of 2020 or the first quarter of 2021. With regard to Nektar's ongoing clinical studies of NKTR-262 (the Phase 1/2 REVEAL study) and NKTR-255, these studies have thus far largely remained on track although we have experienced some challenges with new investigator site initiations. Nonetheless, the ongoing COVID-19 pandemic could still impact the timely completion of these studies by approximately three months. For clinical studies of our proprietary drug candidates being run by our partners, BMS previously announced inMarch 2020 , that due to the COVID-19 pandemic, it had continued enrolling at existing investigator sites that had previously established remote monitoring capability, but paused initiation of new investigator sites for all of its studies, which include the first-line melanoma study and the muscle-invasive bladder cancer study, both evaluating the combination of bempegaldesleukin and Opdivo®. More recently, BMS indicated it has re-started enrollment activities and initiation of new investigator sites. BMS recently extended their timeline estimates by approximately six months for the first data read-outs for the first-line melanoma trial. We will continue to monitor the progress of the BMS-led studies. Our partner Lilly, which is running clinical trials of NKTR-358, temporarily suspended recruitment for the ongoing Phase 1b studies in atopic dermatitis and psoriasis as a result of the COVID-19 pandemic. For these trials, we will have likely delays of at least three to six months. Lilly continues to project Phase 2 study starts in the second half of 2020 in moderate to severe lupus patients and another undisclosed auto-immune disease indication. The rapid development and fluidity of the COVID-19 pandemic preclude any firm estimates as to the ultimate effect this disease will have on collaborator's clinical trials. As a result, there remains substantial uncertainty as to potential impacts on our collaboration partner studies. With regard to our IND-enabling research, although the COVID-19 pandemic has caused us to reduce the number of employees working at our sites, a subset of our research-based employees continues to conduct laboratory work in our research facilities (which is permitted under the applicable government ordinances). As a result, we continue to make progress in the identification of new drug candidates. In an effort to mitigate the negative effects of the COVID-19 pandemic on our clinical trials (both in terms of clinical trial timelines and integrity of clinical study data), we have taken steps to help our clinical trial investigators and their teams continue to provide care and uninterrupted access to their patients. Particularly, in the context of our clinical trials directed to investigational cancer treatments, for example, we are actively working with our study sites to implement measures to prevent study protocol violations, to minimize any disruption of treatment visits, to accommodate for patient visit delays caused by limited access to healthcare facilities, to leverage alternative methods for maintaining clinical trial integrity, and to properly record patient event data that may be influenced by the COVID-19 pandemic. In addition, to the extent that the integrity of individual patient data is negatively affected by the COVID-19 pandemic, we will consider measures to maintain the integrity of the clinical study overall (such as over-enrolling patients into the study and removing all patients originating from an affected study site when performing statistical analyses of study endpoints). Although these measures may have the benefit of preserving the overall integrity of a clinical study, implementing these measures could result in a delay in completing the study. In this respect, we are also incorporating recent direction and flexibility provided by regulatory authorities, including theUnited States Food and Drug Administration in itsMarch 18, 2020 Guidance (most recently updatedJuly 2, 2020 ) entitled "FDA Guidance on Conduct of Clinical Trials of Medicinal Products during COVID-19 Public Health Emergency." This Guidance is continually being updated by FDA and updates can be found on theFDA's website at www.fda.gov. In addition, we may refer to guidance documents from other regulatory agencies, such as, for example, theEuropean Medicines Agency's "Implications of coronavirus disease (COVID-19) on methodological aspects of ongoing clinical trials" found on www.ema.europa.eu, which are also continually being updated. With respect to financing our near-term business needs, as set forth below in "Key Developments and Trends in Liquidity and Capital Resources," we estimate we have working capital to fund our current business plans through at least the next twelve months. 25 -------------------------------------------------------------------------------- Table of Contents Key Developments and Trends in Liquidity and Capital Resources We estimate that we have working capital to fund our current business plans through at least the next twelve months. As ofJune 30, 2020 , we had approximately$1.2 billion in cash and investments in marketable securities. OnApril 13, 2020 , we repaid the principal and accrued interest of our senior notes totaling$254.8 million . See Note 1 to our Condensed Consolidated Financial Statements for additional information. Results of Operations Three and Six Months EndedJune 30, 2020 and 2019 Revenue (in thousands, except percentages) Increase/ Percentage Increase/ (Decrease) (Decrease) Three Months Ended June 30, 2020 vs. 2019 2020 vs. 2019 2020 2019 Product sales$ 5,485 $ 4,346 $ 1,139 26 % Royalty revenue 9,403 7,343 2,060 28 % Non-cash royalty revenue related to sale of future royalties 7,684 9,091 (1,407) (15) % License, collaboration and other revenue 26,275 2,535 23,740 >100% Total revenue$ 48,847 $ 23,315 $ 25,532 >100% Increase/ Percentage Increase/ (Decrease) (Decrease) Six Months Ended June 30, 2020 vs. 2019 2020 vs. 2019 2020 2019 Product sales$ 8,929 $ 8,744 $ 185 2 % Royalty revenue 19,122 18,733 389 2 % Non-cash royalty revenue related to sale of future royalties 17,579 17,321 258 1 % License, collaboration and other revenue 53,790 6,739 47,051 >100% Total revenue$ 99,420 $ 51,537 $ 47,883 93 % Our revenue is derived from our collaboration agreements, under which we may receive product sales revenue, royalties, and license fees, as well as development and sales milestones and other contingent payments. We recognize revenue when we transfer promised goods or services to our collaboration partners. The amount of upfront fees received under our license and collaboration agreements allocated to continuing obligations, such as development or manufacturing and supply commitments, is generally recognized as we deliver products or provide development services. As a result, there may be significant variations in the timing of receipt of cash payments and our recognition of revenue. We make our best estimate of the timing and amount of products and services expected to be required to fulfill our performance obligations. Given the uncertainties in research and development collaborations, significant judgment is required to make these estimates. Product Sales Product sales include predominantly fixed price manufacturing and supply agreements with our collaboration partners and are the result of firm purchase orders from those partners. The timing of shipments is based solely on the demand and requirements of our collaboration partners and is not ratable throughout the year. Product sales were consistent for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 . We expect product sales for the full year of 2020 to be lower than 2019. At this time, we do not anticipate that effects of the COVID-19 pandemic will impact our product sales. Royalty Revenue We receive royalty revenue from certain of our collaboration partners based on their net sales of commercial products. Royalty revenue for the six months endedJune 30, 2020 was consistent with the six months endedJune 30, 2019 . At this time, we 26 -------------------------------------------------------------------------------- Table of Contents cannot estimate the effects of the COVID-19 pandemic on the net sales of the commercial products of our collaboration partners and our resulting royalty revenues. Non-cash Royalty Revenue Related to Sale of Future Royalties For a discussion of our Non-cash royalty revenue, please see our discussion below "Non-Cash Royalty Revenue and Non-Cash Interest Expense." License, Collaboration and Other Revenue License, collaboration and other revenue includes the recognition of upfront payments, milestone and other contingent payments received in connection with our license and collaboration agreements and certain research and development activities. The level of license, collaboration and other revenue depends in part upon the achievement of milestones and other contingent events, the continuation of existing collaborations, the amount of our research and development services, and entering into new collaboration agreements, if any. During the three months endedMarch 31, 2020 , we recognized$25.0 million in license, collaboration and other revenue for the achievement of the first patient, first visit in the registrational muscle-invasive bladder cancer trial under the BMS Collaboration Agreement. During the three months endedJune 30, 2020 , we recognized$25.0 million in license, collaboration and other revenue for the milestone for the first patient, first visit in the registrational adjuvant melanoma trial, also under the BMS Collaboration Agreement. Although we did not achieve the first patient, first visit untilJuly 27, 2020 , in the adjuvant melanoma trial, we concluded that a reversal of the milestone was not probable as ofJune 30, 2020 . As a result, license, collaboration and other revenue increased during the three and six months endedJune 30, 2020 as compared to the three and six months endedJune 30, 2019 due to the recognition of these milestones. We expect that our license, collaboration and other revenue will increase significantly in the full year of 2020 compared to 2019 as a result of the recognition of these milestones. The timing and future success of our drug development programs and those of our collaboration partners are subject to a number of risks and uncertainties. See Item 1A. Risk Factors for discussion of the risks associated with the complex nature of our collaboration agreements. Cost of Goods Sold and Product Gross Margin (in thousands, except percentages) Increase/ Percentage Increase/ (Decrease) (Decrease) Three Months Ended June 30, 2020 vs. 2019 2020 vs. 2019 2020 2019 Cost of goods sold$ 5,773 $ 5,018 $ 755 15 % Product gross profit (288) (672) 384 (57) % Product gross margin (5) % (15) % Increase/ Percentage Increase/ (Decrease) (Decrease) Six Months Ended June 30, 2020 vs. 2019 2020 vs. 2019 2020 2019 Cost of goods sold$ 9,584 10,458$ (874) (8) % Product gross profit (655) (1,714) 1,059 (62) % Product gross margin (7) % (20) % Our strategy is to manufacture and supply polymer reagents to support our proprietary drug candidates or our third-party collaborators where we have a strategic development and commercialization relationship or where we derive substantial economic benefit. We have elected to only enter into and maintain those manufacturing relationships associated with long-term collaboration agreements which include multiple sources of revenue, which we view holistically and in aggregate. We have a 27 -------------------------------------------------------------------------------- Table of Contents predominantly fixed cost base associated with our manufacturing activities. As a result, our product gross profit and margin are significantly impacted by the mix and volume of products sold in each period. Product gross margin was negative for the three and six months endedJune 30, 2020 andJune 30, 2019 . We have a manufacturing arrangement with a partner that includes a fixed price which is less than the fully burdened manufacturing cost for the reagent, and we expect this situation to continue with this partner in future years. In addition to product sales from reagent materials supplied to the partner where our sales are less than our fully burdened manufacturing cost, we also receive royalty revenue from this collaboration. In the three and six months endedJune 30, 2020 and 2019, the royalty revenue from this collaboration exceeded the related negative gross profit. We expect product gross margin to continue to fluctuate in future periods depending on the level and mix of manufacturing orders from our customers. We currently expect product gross margin to be negative in 2020 as a result of the manufacturing arrangement described above. Research and Development Expense (in thousands, except percentages) Increase/ Percentage Increase/ (Decrease) (Decrease) Three Months Ended June 30, 2020 vs. 2019 2020 vs. 2019 2020 2019 Research and development expense$ 96,436 $ 106,686 $ (10,250) (10) % Increase/ Percentage Increase/ (Decrease) (Decrease) Six Months Ended June 30, 2020 vs. 2019 2020 vs. 2019 2020 2019 Research and development expense$ 205,423 $ 225,149 $ (19,726) (9) % Research and development expense consists primarily of clinical study costs, contract manufacturing costs, direct costs of outside research, materials, supplies, licenses and fees as well as personnel costs (including salaries, benefits, and stock-based compensation). Research and development expense also includes certain overhead allocations consisting of support and facilities-related costs. Where we perform research and development activities under a clinical joint development collaboration, such as our collaboration with BMS, we record the expense reimbursement from our partners as a reduction to research and development expense, and we record our share of our partners' expenses as an increase to research and development expense. Research and development expense decreased for the three and six months endedJune 30, 2020 compared to the three and six months endedJune 30, 2019 primarily due to pre-commercial manufacturing costs for NKTR-181 that we incurred during the three and six months endedJune 30, 2019 . Although we continued pre-commercial manufacturing activities for NKTR-181 during 2019 and early 2020, we present the costs of these activities for the six months endedJune 30, 2020 in the Impairment of assets and other costs related to terminated program line in our Condensed Consolidated Statements of Operations as a result of our decision to withdraw our NDA for NKTR-181. The costs of our clinical development program, including bempegaldesleukin, NKTR-358, NKTR-262 and NKTR-255, were consistent between the three and six months endedJune 30, 2020 compared to the three and six months endedJune 30, 2019 . During the three and six months endedJune 30, 2020 , we recorded net reductions to research and development expense for BMS's reimbursements of our costs of$33.9 million and$65.1 million , respectively. During the three and six months endedJune 30, 2019 , we recorded net reductions to research and development expense for BMS's reimbursements of our costs of$24.6 million and$53.4 million , respectively. Under the BMS Collaboration Agreement, BMS generally bears 67.5% of development costs for bempegaldesleukin in combination with Opdivo® and 35% of costs for manufacturing bempegaldesleukin. Please see Note 6 to our Condensed Consolidated Financial Statements for additional information regarding our BMS Collaboration Agreement. We expect research and development expense to increase for 2020 compared to 2019 primarily as a result of advancing development of bempegaldesleukin under the BMS Collaboration Agreement. In addition, we are collaborating with Lilly to develop NKTR-358, and Lilly is planning additional studies, which are expected to begin in 2020, for which we are responsible for 25% of costs. We are continuing to enroll patients in a dose-escalation Phase 1/2 study for NKTR-262 in combination with bempegaldesleukin. We are also continuing our Phase 1 dose-escalation studies for NKTR-255 in multiple myeloma and non-Hodgkin lymphoma. The timing and amount of our future clinical investments will vary significantly based upon our evaluation of ongoing clinical results and the structure, timing, and scope of potential collaboration partnerships (if any) for these programs. 28 -------------------------------------------------------------------------------- Table of Contents In addition to our drug candidates that we plan to evaluate in clinical development during 2020 and beyond, we believe it is vitally important to continue our substantial investment in a pipeline of new drug candidates to continue to build the value of our drug candidate pipeline and our business. Our discovery research organization is identifying new drug candidates by applying our polymer conjugate technology platform to a wide range of molecule classes, including small molecules and large proteins, peptides and antibodies, across multiple therapeutic areas. We plan to continue to advance our most promising early research drug candidates into preclinical development with the objective to advance these early stage research programs to human clinical studies over the next several years. Our expenditures on current and future preclinical and clinical development programs are subject to numerous uncertainties in timing and cost to completion. In order to advance our drug candidates through clinical development, each drug candidate must be tested in numerous preclinical safety, toxicology and efficacy studies. We then conduct clinical studies for our drug candidates that take several years to complete. The cost and time required to complete clinical trials may vary significantly over the life of a clinical development program as a result of a variety of factors, including but not limited to: •the number of patients required for a given clinical study design; •the length of time required to enroll clinical study participants; •the number and location of sites included in the clinical studies; •the clinical study designs required by the health authorities (i.e. primary and secondary endpoints as well as the size of the study population needed to demonstrate efficacy and safety outcomes); •the potential for changing standards of care for the target patient population; •the competition for patient recruitment from competitive drug candidates being studied in the same clinical setting; •the costs of producing supplies of the drug candidates needed for clinical trials and regulatory submissions; •the safety and efficacy profile of the drug candidate; •the use of clinical research organizations to assist with the management of the trials; and •the costs and timing of, and the ability to secure, approvals from government health authorities. Furthermore, our strategy includes the potential of entering into collaborations with third parties to participate in the development and commercialization of some of our drug candidates such as those collaborations that we have already completed for bempegaldesleukin, NKTR-358 and MOVANTIK®. In certain situations, the clinical development program and process for a drug candidate and the estimated completion date will largely be under the control of that third party and not under our control. We cannot forecast with any degree of certainty which of our drug candidates will be subject to future collaborations or how such arrangements would affect our development plans or capital requirements. As noted above, the evolving situation around the COVID-19 pandemic has had varying impacts on the clinical testing of our proprietary drug candidates depending on the therapeutic indication, geographic distribution of clinical trial sites, the clinical trial stage, and, in certain cases, our partners' general corporate approach to the pandemic. We currently believe that we could experience delays of approximately three months for earlier stage Nektar-run clinical studies (such as the Phase 1/2 trial studying bempegaldesleukin and pembrolizumab in NSCLC). In addition, for certain clinical studies involving our proprietary drug candidates that are run by our partners, study timelines are estimated to be delayed at least three to six months. As a result of these delays and potential delays, we may incur additional costs associated with these clinical trials. At this time, we cannot estimate if such increases would have a material effect on our results of operations or financial position. The risks and uncertainties associated with our research and development projects are discussed more fully in Item 1A. Risk Factors. As a result of the uncertainties discussed above, we are unable to determine with any degree of certainty the duration and completion costs of our research and development projects, anticipated completion dates or when and to what extent we will receive cash inflows from a collaboration arrangement or the commercialization of a drug candidate. 29 -------------------------------------------------------------------------------- Table of Contents General and Administrative Expense (in thousands, except percentages) Increase/ Percentage Increase/ (Decrease) (Decrease) Three Months Ended June 30, 2020 vs. 2019 2020 vs. 2019 2020 2019 General and administrative expense$ 24,347 $ 22,581 $ 1,766 8 % Increase/ Percentage Increase/ (Decrease) (Decrease) Six Months Ended June 30, 2020 vs. 2019 2020 vs. 2019 2020 2019 General and administrative expense$ 50,564 $ 47,587 $ 2,977 6 % General and administrative expense includes the cost of administrative staffing, commercial, finance and legal activities. General and administrative expense increased during the three and six months endedJune 30, 2020 compared with the three and six months endedJune 30, 2019 . We expect general and administrative expenses in the full year of 2020 to increase compared to 2019, primarily due to increased personnel costs as we begin a stage appropriate build of our commercial capability to launch and co-commercialize bempegaldesleukin with BMS as early as 2021. At this time, we do not anticipate that the effects of the COVID-19 pandemic will materially affect our general and administrative expense. Impairment of Assets and Other Costs for Terminated Program OnJanuary 14, 2020 , the jointFDA Anesthetic Drug Products Advisory Committee andDrug Safety and Risk Management Committee did not recommend approval of our NDA for NKTR-181. As a result, we withdrew our NDA and decided to make no further investments in this program. OnFebruary 26, 2020 , the Audit Committee of our Board of Directors approved management's plan for the wind-down of Inheris and the NKTR-181 program. As a result, in the three months endedMarch 31, 2020 , we wrote off$19.7 million of advance payments to contract manufacturers for commercial batches of NKTR-181. We also incurred$25.5 million of additional costs, primarily for non-cancellable commitments to our contract manufacturers and certain severance costs. Interest Expense (in thousands, except percentages) Increase/ Percentage Increase/ (Decrease) (Decrease) Three Months Ended June 30, 2020 vs. 2019 2020 vs. 2019 2020 2019 Interest expense$ 647 $ 5,231 $ (4,584) (88) % Increase/ Percentage Increase/ (Decrease) (Decrease) Six Months Ended June 30, 2020 vs. 2019 2020 vs. 2019 2020 2019 Interest expense$ 6,851 $ 10,457 $ (3,606) (34) % Interest expense during the three and six months endedJune 30, 2020 and 2019 primarily consisted of interest from our senior secured notes. InOctober 2015 , we issued$250.0 million in aggregate principal amount of 7.75% senior secured notes dueOctober 2020 . Interest on the 7.75% senior secured notes was calculated based on actual days outstanding over a 360 day year. OnApril 13, 2020 , we redeemed the senior secured notes at par and therefore repaid the principal of$250.0 million and accrued interest of$4.8 million . After the repayment, we incurred no interest expense. Accordingly, interest expense for the three and six months endedJune 30, 2020 decreased as compared to the three and six months endedJune 30, 2019 . 30 -------------------------------------------------------------------------------- Table of Contents Non-Cash Royalty Revenue and Non-Cash Interest Expense Increase/ Percentage Increase/ (Decrease) (Decrease) Three Months Ended June 30, 2020 vs. 2019 2020 vs. 2019 2020 2019 Non-cash royalty revenue related to sale of future royalties$ 7,684 $ 9,091 $ (1,407) (15) % Non-cash interest expense on liability related to sale of future royalties 6,691 5,975 716 12 % Increase/ Percentage Increase/ (Decrease) (Decrease) Six Months Ended June 30, 2020 vs. 2019 2020 vs. 2019 2020 2019 Non-cash royalty revenue related to sale of future royalties$ 17,579 $ 17,321 $ 258 1 % Non-cash interest expense on liability related to sale of future royalties 13,659 12,040 1,619 13 % For a discussion of the sale of future royalties for CIMZIA® and MIRCERA®, see Note 4 to our Condensed Consolidated Financial Statements. As discussed in Note 4, we continue to recognize non-cash royalty revenue for net sales of CIMZIA® and MIRCERA®, which was consistent for the six months endedJune 30, 2020 andJune 30, 2019 . Non-cash interest expense increased for the three and six months endedJune 30, 2020 compared with the three and six months endedJune 30, 2019 due to an increase in the estimated implicit interest rate over the life of the transaction. When forecasted future revenues rise, this results in an increase to the estimated implicit interest rate over the life of the transaction, which, in turn, increases the prospective effective interest rate in the current and future periods. We recognized non-cash interest expense at an effective rate of 29% for the three and six months endedJune 30, 2019 , reflecting the estimated implicit interest rate over the life of the transaction of approximately 18.7%. During the fourth quarter of 2019, due to sustained increases in the forecasted sales of CIMZIA® and MIRCERA®, we increased our estimated implicit interest rate over the life of the agreement from 18.7% to approximately 19.5%, which resulted in a prospective interest rate of 38%. The rate remained unchanged during the three and six months endedJune 30, 2020 . Over the term of this arrangement, the net proceeds of the transaction of$114.0 million , consisting of the original proceeds of$124.0 million , net of$10.0 million in payments from us to RPI, is amortized as the difference between the non-cash royalty revenue and the non-cash interest expense. To date, we have amortized$44.4 million of the net proceeds. We periodically assess future non-cash royalty revenues, and we may adjust the prospective effective interest rate based on our best estimates of future non-cash royalty revenue such that future non-cash interest expense will amortize the remaining$69.6 million of the net proceeds. There are a number of factors that could materially affect our estimated interest rate, in particular, the amount and timing of royalty payments from future net sales of CIMZIA® and MIRCERA®. As a result, future interest rates could differ significantly, and we will adjust any such change in our estimated interest rate prospectively. At this time, we cannot estimate the effects of the COVID-19 pandemic on net sales of CIMZIA® and MIRCERA® and the resulting effects on our non-cash royalty revenue and potential effects on our estimated implicit rate for non-cash interest expense. 31
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Table of Contents Interest Income and Other Income (Expense), net (in thousands, except percentages) Increase/ Percentage Increase/ (Decrease) (Decrease) Three Months Ended June 30, 2020 vs. 2019 2020 vs. 2019 2020 2019 Interest income and other income (expense), net$ 5,191 $ 11,989 $ (6,798) (57) % Increase/ Percentage Increase/ (Decrease) (Decrease) Six Months Ended June 30, 2020 vs. 2019 2020 vs. 2019 2020 2019 Interest income and other income (expense), net$ 13,543 $ 24,472 $ (10,929) (45) % Interest income and other income (expense) decreased for the three and six months endedJune 30, 2020 compared to the three and six months endedJune 30, 2019 due to lower investment balances which have been utilized to fund our operations and the repayment of our senior notes onApril 13, 2020 , as well as decreases in market interest rates. We expect that our interest income and other income (expense), net will decrease for 2020 compared to 2019 for these same reasons. Additionally, due to the COVID-19 pandemic, the effective interest rate earned on new investments purchased as existing securities in our portfolio mature has been lower than historical interest rates and we expect this trend to continue. Liquidity and Capital Resources We have financed our operations primarily through revenue from product sales, royalties and strategic collaboration agreements, as well as public offering and private placements of debt and equity securities. AtJune 30, 2020 , we had approximately$1.2 billion in cash and investments in marketable securities. As noted above, onApril 13, 2020 , we repaid the principal and accrued interest of our senior notes totaling$254.8 million . We estimate that we have working capital to fund our current business plans for the next twelve months. We expect the clinical development of our proprietary drug candidates including bempegaldesleukin, NKTR-358, NKTR-262 and NKTR-255 will continue to require significant investment to continue to advance in clinical development with the objective of entering into a collaboration partnership or obtaining regulatory approval. In the past, we have received a number of significant payments from collaboration agreements and other significant transactions. InApril 2018 , we received a total of$1.85 billion from BMS including a$1.0 billion upfront payment and an$850.0 million premium investment in our common stock. InJuly 2017 , we entered into a collaboration agreement for NKTR-358 with Lilly, under which we received a$150.0 million upfront payment. In the future, we expect to receive substantial payments from our collaboration agreements with BMS and Lilly and other existing and future collaboration transactions if drug candidates in our pipeline achieve positive clinical or regulatory outcomes. In particular, under the BMS Collaboration Agreement, we are entitled to$1.455 billion of clinical, regulatory and commercial launch milestones (of which, we have received$25.0 million ). Of the remaining milestones,$625.0 million are associated with approval and launch of bempegaldesleukin in its first indication in theU.S. , EU andJapan (which reflects the reduction for the$25.0 million nonrefundable, creditable milestone for the first patient, first visit in the muscle-invasive bladder cancer trial that BMS paid to us inMarch 2020 ). As a result, whether and when bempegaldesleukin is approved in any indication will have a significant impact on our future liquidity and capital resources. We have no credit facility or any other sources of committed capital. In the short term, we do not anticipate that the effects of the COVID-19 pandemic will have a material effect on our results of operations or financial position since we do not generate significant cash flows from recurring revenues and our revenues are generally less affected by shelter-in place or similar orders. However, if the effects of the COVID-19 pandemic delay the commencement or enrollment of patients in our clinical trials, the completion of these trials may also be delayed, which in turn may delay our ability to file for regulatory approval and commercialize these products (if approved) or enter into collaboration agreements. Due to the potential for adverse developments in the credit markets, we may experience reduced liquidity with respect to some of our investments in marketable securities. These investments are generally held to maturity, which, in accordance with our investment policy, is less than two years. However, if the need arises to liquidate such securities before maturity, we may experience losses on liquidation. To date we have not experienced any liquidity issues with respect to these securities. We believe that, even allowing for potential liquidity issues with respect to these securities and the effect of the COVID-19 pandemic on the 32 -------------------------------------------------------------------------------- Table of Contents financial markets, our remaining cash and investments in marketable securities will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our current business plan is subject to significant uncertainties and risks as a result of, among other factors, clinical and regulatory outcomes for bempegaldesleukin, the sales levels of our products, if and when they are approved, the sales levels for those products for which we are entitled to royalties, clinical program outcomes, whether, when and on what terms we are able to enter into new collaboration transactions, expenses being higher than anticipated, unplanned expenses, cash receipts being lower than anticipated, and the need to satisfy contingent liabilities, including litigation matters and indemnification obligations. The availability and terms of various financing alternatives, if required in the future, substantially depend on many factors including the success or failure of drug development programs in our pipeline. The availability and terms of financing alternatives and any future significant payments from existing or new collaborations depend on the positive outcome of ongoing or planned clinical studies, whether we or our partners are successful in obtaining regulatory authority approvals in major markets, and if approved, the commercial success of these drugs, as well as general capital market conditions. We may pursue various financing alternatives to fund the expansion of our business as appropriate. Cash flows from operating activities Cash flows used in operating activities for the six months endedJune 30, 2020 totaled$162.0 million , which includes$177.3 million of net operating cash uses as well as$9.7 million for interest payments on our senior secured notes, partially offset by the receipt of the$25.0 million milestone payment from BMS for the achievement of the first patient, first visit in the registrational muscle invasive bladder cancer trial. Cash flows used in operating activities for the six months endedJune 30, 2019 totaled$134.8 million , which includes$135.3 million of net operating cash uses as well as$9.5 million for interest payments on our senior secured notes, partially offset by the receipt of a$10.0 million sales milestone payment from our collaboration agreement with Baxalta. We expect that cash flows used in operating activities, excluding upfront, milestone and other contingent payments received, will increase in the full year of 2020 compared to 2019 primarily as a result of increased research and development expenses. Cash flows from investing activities We paid$3.6 million and$17.3 million for the purchase or construction of property, plant and equipment in the six months endedJune 30, 2020 and 2019, respectively. The decrease for the six months endedJune 30, 2020 compared with the six months ended 2019 resulted from the construction of leasehold improvements at our facilities lease inSan Francisco during 2019. We expect our capital expenditures in the full year of 2020 to decrease compared with 2019, primarily due to the completion of the construction of these leasehold improvements. During the six months endedJune 30, 2020 , our maturities and sales of investments, net of purchases, totaled$358.4 million , which we used to redeem our senior notes and accrued interest of$254.8 million and to fund our operations. Cash flows from financing activities We received proceeds from issuance of common stock related to our employee option and stock purchase plans of$19.1 million and$12.2 million in the six months endedJune 30, 2020 and 2019, respectively. OnApril 13, 2020 , we repaid the principal of our senior notes totaling$250.0 million . See Note 1 to our Condensed Consolidated Financial Statements for additional information. Contractual Obligations Other than the repayment of our senior notes, there were no material changes outside the ordinary course of business during the six months endedJune 30, 2020 to the summary of contractual obligations included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 on file with theSEC . Off-Balance Sheet Arrangements We do not utilize off-balance sheet financing arrangements as a source of liquidity or financing. 33
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